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How Taking Out Loans Can Impact Your Credit Score

@toingry

Be careful what you apply for.

For many, one of the biggest considerations when taking out any form of loan or other financial product is how this will impact their credit score. A credit score is one of the most important factors when it comes to being accepted for a loan of any kind and as a result, any negative impact on your credit score could see you being unable to take out a loan or other form of financial product in the future. Whether you’re looking at taking out payday loans or a mortgage, your credit score is going to be in the back of your mind. Here, we’re taking a closer look at how loans can impact your credit score overall.

Loan Applications

On a credit score, approximately 10% is based on the number of credit-based applications you have made over the course of your borrowing life. Every time you apply for a loan or other form of credit, an inquiry will be placed on your report in order to show other businesses that someone has been looking at your credit report as part of an application. If you apply for a number of loans within a short amount of time, this can make you appear somewhat desperate to be lent the funds, making you seem like a suspicious borrower. This can also harm your credit score, as every time you apply you may see your points drop very slightly. There is more than just one credit score company however, and each report will offer a different view on inquiries and how this impacts your credit report. It is important to understand this prior to your application to ensure you are not left with a negatively impacted credit score.

Pay Your Loans On Time

While an application will be seen on your credit score, this isn’t where your concern should really lie. Instead, you should always focus on ensuring that your debts are paid off on time without fail, as any default on a loan or financial product can have a significant impact on your credit score. Payment history makes up approximately 35% of your credit score, meaning that even just one small late payment can have a serious impact. Ensuring that your loans are paid off on time can actually make you seem like an attractive borrower, opening up further borrowing opportunities in the future.

High Loan Balances

It is important to consider that a high loan balance can have an impact on your credit score, and you’ll gain more points as your balance begins to go down. Simply, the larger the gap between your loan amount left to be paid off and the total loan balance, the better your credit score will be overall. Therefore, you may find that your credit score changes as soon as your loan has been accepted but by the time you have paid off your loan, your score is actually likely to have improved, as long as you pay off the repayments on time (as mentioned above).

As you can see, taking out a loan can impact your credit score, but as long as you make your repayments on time you should see that this works as a positive impact instead of a negative one. Your credit score is also just a small part of what a lender will look at when deciding if you’re a suitable candidate or not, so do not worry if your credit score is less than perfect when applying.

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